|
PureBytes Links
Trading Reference Links
|
Who cares if you have the monopoly to print
money? Addictive government waste and spending?
Who cares if you're the fed? Just more money
to squelch out of working people's pockets in the
form of taxes. I believe it was Rothchild who
said he didn't care who controlled the government as
long as he controlled the money. I guess
that's another version of the golden rule: he who has the
gold makes the rules.
chas
----- Original Message -----
From: <A
href="" title=article@xxxxxxxxx>Mises Daily Article
To: <A href=""
title=article@xxxxxxxxxxxxxxxxx>Mises Daily Article
Sent: Friday, May 16, 2003 8:03 AM
Subject: The Fed is as the Fed Does
<A
href="">http://www.mises.org/fullstory.asp?control=1224
<FONT
face=Verdana>The Fed is as the Fed Does
by Gregory Bresiger
[Posted May 16, 2003]
A review of A History of the Federal Reserve.
Volume 1: 1913–1951 by Allan H. Meltzer, foreword by Alan Greenspan
(University of Chicago Press, 799 pages).
<IMG align=right border=0
src="">Thomas Jefferson, an opponent
of our first national bank, is reputed to have said that a national bank is a
greater threat to liberty than a standing army.
Here, in this interesting book about the history of the
first few generations of the Fed, is a work with countless illustrations of that
Jeffersonian fear of political banks underwritten by governments. To read this
book is like reading a kind of Pentagon Papers of American monetary history: It
is a litany of failed policies and mistaken notions along with frequent calls
for the Fed to obtain greater and greater powers despite its poor
record.
Most economists agree that Fed policies in the wake of the
crash were incredibly wrong policies that led to a banking crisis in 1930 and
1931.
Nevertheless, the book has one glaring weakness: It lacks
an Austrian perspective on central banks. One senses that the relentless
criticisms of the Fed in this book are designed to reform the Fed; that Meltzer
is preparing a case for, as Milton Friedman has elsewhere, an automatic pilot
that would restrain the ability of the Fed to carry out monetary mischief.
Many episodes of the latter are well documented in this
work. The Meltzer/Friedman critique of the Fed is a kind of monetary
glasnost. It criticizes the Fed in the interest of preserving the Fed.
The Austrian view of the Fed is one that holds the Fed can't reform itself; that
central banking is a system that is inherently corrupt. Liberty, as well as the
health of our economy, is in danger as long as we have a central
bank.
Possibly the biggest chapter in the Fed's sad record is
the one on the Fed's wrongheaded policies leading up to and after the Great
Crash of 1929. And here is where Allan Meltzer's book goes off the tracks.
Meltzer writes that the Fed consistently misread the
signals just before the crash. It then contracted the money supply after the
crash. This turned what might have been a short recession into the greatest
depression in the nation's history. The first part of that analysis is right,
but the second part is wrong.
"If the governors of the Federal Reserve had used the
stock of money instead of interest rates as an indicator of monetary policy,
they would not have concluded that monetary policy was easy," he writes of the
Fed a few months after the crash. "Additional open market purchases at this time
would have contributed to the expansion. Instead, the further contraction of
money contributed to the decline in output and to the bank failures that came
with increased frequency after this meeting" (page 298).
Here's where Meltzer runs straight into the Austrian
view, a view that holds that central banks distort the production structure and
create business cycles. When their policies fail, central bankers blame markets,
speculators and any convenient target for the problems. They also, tacitly or
overtly, inject bigger and bigger doses of inflation into the economy, even
though this is what caused the problems in the first place.
Why did the Fed's policies of the 1920s and 1930s fail?
Was it because the Fed contracted the money supply or was it, in fact, because
the Fed, along with flawed fiscal policies pursued by the Hoover administration,
was creating too much money and running huge deficits—the same policies now
advocated by the Bush administration—thereby preventing the purging of
malinvestments? The purging process had cured previous depressions, but
this time the Fed and the administration were not going to let it happen.
At the time of the Great Crash and its immediate
aftermath, the money supply seemed to be contracting, according to Meltzer.
Actually, the Fed was furiously trying to expand the money supply. The money
supply did decline in the first years of the depression, but this not because of
the Fed's actions but rather in spite of them. Banks were failing because
people lost confidence and wanted their money. Foreigners lost confidence in the
dollar and wanted gold. Hundreds of millions of dollars in the gold stock were
lost in the early 1930s.
Also, Hoover was running huge deficits, trying to use the
same Keynesian policies to rescue the economy, even though Keynes's famous book
was still to be written. He wanted no part of the traditional purging of
malinvestments. He wasn't going to let it happen. But market forces overwhelmed
his policies. Hoover was enraged with those who wanted their deposits and wanted
gold. He railed against "traitorous hoarding," writes Murray Rothbard in <A
href="">A
History of Money and Banking in the United States: The Colonial Era to World War
II. Indeed, Hoover even set up a task force, Rothbard writes, to
fight those who would not play along with the inflation. "The battle front today
is against the hoarding of currency," Hoover noted in 1932 as the depression
droned on.
The Fed was doing its best to expand monetary supply—like
today's Fed furiously cutting interest rates and getting nowhere—but it didn't
work then just as it isn't working today. Nevertheless, Hoover and his
supporters at the Fed blamed "hoarders" and others who could see the con games
that were going on. This is no different than another generation that blamed
"speculators" in the 1970s who bought hard assets and jettisoned dollars. They
did so because they were smart enough to see the counterfeiting games of
another Fed and a venal president, Nixon, who were happy to distort monetary
policy for their own purposes.
In fact, the Fed's big open market purchases in the
1930–32 period "retarded the process of liquidation and reduction of costs." And
that accentuated the depression, according to Professor Seymour E. Harris, who
was cited in Rothbard's <A
href="">America's
Great Depression. The Fed's pumping up process—seemingly so successful
in the 1920s—no longer worked—just as it seemed to work in the 1990s and no
longer works today.
Rothbard, in his monetary history, wrote that in a typical
year in the 1920s, some 700 banks failed with deposits totaling $170
million. After the crash, the number was 17,000 banks a year, totaling some
$1.08 billion in deposits.
The Fed's failure in the Great Crash and after—and
remember the Fed came into existence in 1913 with the promise of avoiding just
such economic peaks and valleys—is indisputable. This record started to attract
the attention of many critics on both the right and the left over succeeding
generations.
Even though Meltzer never calls for the abolition of the
Fed, as many Austrian economists have, his book flies in the face of the
mythology of a Fed that would end the business cycle. The Fed skeptics, in the
1920s, 1990s, and today, have been vindicated by history. Indeed, even Alan
Greenspan, in a foreword to this book, restates the skeptical view of the Fed's
Great Depression policies: "In Meltzer's view, the System's adherence to the
real bills doctrine, combined with a belief that the purging of speculative
excess was necessary to set the stage for price stability, led to the failure of
monetary policy to lessen the decline."
The silence after this passage is deafening. Greenspan
never challenges that view. One must conclude that the venerable chairman is in
agreement that his predecessors botched things.
But then again this skepticism about central banks is as
old as our republic. It is a frequent current of American history and could be a
subtheme of this book, which was written by a former member of the President's
Council of Economic Advisers.
Meltzer details countless mistakes made by our central
bankers, some of them so ridiculous that one wonders why any economically
literate person still has any trust in the Federal Reserve Board. So Meltzer's
book could be cited by Austrian scholars who believe that central banks are
inherently flawed and inflationary; that their record is one of disastrous
inflations.
In my youth, I also lived through many of the mistakes of
this seemingly unchallengeable government institution, which along with so many
other flawed government institutions—Social Security, Amtrak and monopoly
mail—are proving that giving government exclusive control over almost anything
is a guarantee of failure.
The Fed's great failure in my youth was the perverting of
monetary policy in the early 1970s. This rigging of money creation policy was
designed to reelect Richard Nixon, which it accomplished (By the way, Nixon
pressured his Fed chairman because he believed that the distortion of monetary
policy had denied him the White House on his first try for the brass ring in
1960).
The mistakes of the Fed didn't end with the Great Crash.
They continued with the flooding of the markets with currency to help Richard
Nixon's reelection in 1972 and with the recent inflation of the 1990s, the
latter two capers are beyond this first volume. I am eager to see how Meltzer
deals with these notorious chapters in the succeeding volume of this work.
However, the first years of the Fed were as fascinating and gruesome as
exploring the origins of a train wreck.
The Fed's governors, says Meltzer, often erred because
they failed to understand a basic principle of economics. Therefore, their money
creation policies were—time and again—flawed. Fed governors, the author
concludes in a devastating critique, "failed to distinguish between nominal and
real rates of interest" (page 411).
|